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2019: Investors not excited about economic projections

Published by The Nation on Sun, 02 Dec 2018


As 2018 winds down, the receive wisdom out there is that the economic headwinds of the outgoing year vis--vis projections for the incoming year does not bode well for the economy what with the falling share prices, unfavourable monetary policy regime, staggering inflation, growing investor apathy, weakening naira, political uncertainty amongst other indices. Ibrahim Apekhade Yusuf, Charles Okonji and Medinat Kanabe examine the issuesTo the uninformed and unlettered, asking them to diagnose the problem of the country may elicit different answers. But to the discerning mind, the major issue confronting the country is the economy. Indeed to parody the view James Carville, Bill Clintons political strategist, Its the economy, stupid!Reality biteIn the view of Victor Ndukauba, deputy Managing Director, Afrinvest West Africa, the macroeconomic variables that the economy has been facing in months is a complex one and painfully defied any solutions.The countrys economic managers, he noted, have been concerned about keeping the interest rate competitive, growing the economy as well as stabilising the exchange rate. Unfortunately it is impossible to pick all three. You cant pick all three variables to your own desired outcome. You can pick one, lose one but it means you have to sacrifice one at any point in time. So if you are to check Nigeria today where growth is low, people getting poorer. Thats part of the problem. The reality is that the Central Bank has made it clear that its primary focus is on price stability, and the reason why it is price stability is that we have a high component inflation to the extent that a lot of the things we use gadgets, cars; a lot of the things the consumers import are in dollars. There is a huge component in inflation that is tied to import and clearly what drives apex pricing is the exchange rate.Consistence monetary policy regimeOne of the indices for assessing the economy is the monetary policy rate, which from availabale information has remained steadily at 14 per cent in the last three quarters.While capturing the outcome of the Monetary Policy Committee, the CBN Governor Godwin Emefiele had noted matter-of-factly that the macroeconomic environment in 2018 and noted the modest stability thus far achieved in domestic prices, output growth and the financial system.The Committee, he said, noted that the economy was on the right path but some key sectors continued to experience significant challenges. The MPC, however, expressed concern about the tepid growth expectations and growing uncertainty in the global financial markets arising from the poor reception of the Brexit deal by British politicians, continuing trade war between the US and her major trading partners, as well as the commencement of US sanctions on Iran.The MPC welcomed the moderation in inflation in October, reflecting declining food prices. The Committee believes that given the negative output gap, the proposed increase in the national minimum wage would stimulate output growth due to prolonged weak aggregate demand arising from salary arrears and contractor debt. Consequently, its impact on the aggregate price level would be largely muted, given that the monetary aggregates have largely underperformed in fiscal 2018. In addition, the prevailing stability in the foreign exchange market would continue to moderate pressures on the domestic price level.The MPC noted the improvements in the financial stability indicators, including non-performing loans, capital adequacy and liquidity ratios of the Deposit Money Banks (DMBs). It urged the Bank to sustain its surveillance over the Banking industry by taking prompt corrective measures to further improve stability in the system. The Committee also called on the fiscal authorities to build significant buffers to strengthen the efficacy of monetary policy.Overall, the MPC considered the options to loosen, hold or tighten. The Committee continues to hold the view that although loosening would encourage the flow of credit to the real sector, help in reduction of the aggregate cost of credit and spur business spending and investment, thereby reinforcing the CBNs support for output growth and economic recovery, it, however, believed that doing so will reverse more rapidly, the gains of price and exchange rate stability achieved so far given the liquidity impact that would entail. The ensuing liquidity will exert pressure on the exchange rate in the light of increased capital flow reversals arising from monetary policy normalisation by the US Fed. This would further depress the capital market.A divergent viewIn the assessment of FSDH Research, the rising demand for foreign exchange leading to a consistent decline in the foreign reserves, and rising inflation rate are major justifications for an increase in policy rates. However, FSDH Research believes members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may decide to delay an increase in the monetary policy rate until their January 2019 meeting.The MPC will hold its last meeting for the year on Monday, 19 and Tuesday, 20 November 2018. At its meeting in September 2018, the MPC maintained the Monetary Policy Rate (MPR) at 14%, with the asymmetric corridor at +200 and -500 basis points around the MPR; it retained the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50% and 30% respectively. The CBN may continue to use the conduct of Open Market Operations (OMO) to manage the temporary liquidity in the financial system that may affect price stability.A review of the global economy shows that global growth remains fairly strong, but trade restrictions may reduce global growth. This is according to the International Monetary Fund (IMF), which projects a global growth rate of 3.7% for 2018 and 2019. The growth rate forecast is slightly lower than the growth rate projections the IMF released in July 2018.Although FSDH Research notes that despite the recent drop in the price of crude oil on the international market, the moderately strong global growth should sustain global crude oil prices around US$70/b in the short-term. FSDH Research expects the Federal Open Market Committee (FOMC) of the US Federal Reserve to raise the Federal Funds Rate (Fed Rate) by 0.25% when the committee meets in December 2018.Nothing to cheer aboutTo economic watchers, the nations ailing economy have been staggering from recession hangover and clearly on the verge of slipping into another deeper crises which if not properly managed may result in depression.One pointer is the recent trend in the Nigeria Stock Exchange (NSE), occasioned by consistent downward trend in the market capitalisation week-in-week-out in the last three quarters.According to data obtained from the from NSE website, the market capitalisation of listed equities fell by N73bn on Thursday 21November, 2018 as stocks recorded price depreciation at the close of trading on the Exchange, a trend which had been a recurrent decimal for many months now.The Chairman, Policy Committee of Manufacturers Association of Nigeria (MAN) Engineer Reginald Odiah, told The Nation that since September 2018, business investment has been on steady decline; stressing that it is a re-occurring phenomenon in the Nigerian polity.This situation is persistent as there is no confidence in the Nigerian political structure which is marred with instability and policy inconsistencies. Over the last few months, market capitalization has continued to nose dive, and portfolio investors have consistently pulled out their investment. This is not healthy for the economy, as you can see, all of these emanated as a result of the 2019 election which is around the corner. Every reasonable investor has to be sure that his investment is secured before staking his money in an economy like ours, and when you do not have such security, you just have to hold back you investment.Odiah, who was also the former Chairman of Electrical Group of MAN, advised the government to assure investors of economic stability, to establish that election would come and go without the alteration of business cycle, especially on the policy aspect, as it affects the major players and manufacturers alike.The government should assure Nigerians that during and after the election, that there would be stability and security. This happened during the 2015 election and it took everybody by surprise, but we are not sure the same thing would happen this time. Many investors that ought to have put-down their money for the manufacturing sector do not want to do so until after the 2019 general elections. Some have converted their money into hard currencies, as it can only appreciate during this period.Truly, we have noticed that investors are pulling out their investment massively, and people are not thinking of investing until after the election. Also, in developing countries especially in Africa, people are concerned about election, once election is approaching, people are always worried about the result because most Africans at the end of the election, the winners would remain happy and the losers would always fight. For this reason, we have observed from our members and fro the NSE too that investors are constantly pulling out their funds from the existing investments. With the persistent reduction in investment, most business owner result to down-sizing the staff strength, cutting down on productivity, functioning below capacity and in most cases, results in shutting down when the running cost becomes alarming as no company can survive producing at loss.Also, importers are also griped with fears. Most of us import our products with good will, but for now, they dont want to import anything because of the political uncertainties. Creditors would not want to send raw materials to you because they are also worried about the political terrain. They are not actually worried about the result but the after effect of the election. So for now investment is not taking place, Odiah stressed.Echoing similar sentiments, the former Director, Budget and Planning, Central Bank of Nigeria, Titus Okunronmu, stated that huge withdrawal of investment from the Nigerian economy is largely attributed to insecurity, explaining that everyone is skeptical about it investing in the country.Okunronmu identified that the country is bedeviled with the policies that seem not to encourage private investment, saying that foreign investors have to think well before committing their investment into such countries.In the most recent times, the Nigerian economy has not been yielding positively as expected to the investors. When you look at the NSE, many of the stocks are not yielding good dividends, many of them are yielding 10 kobo while some others yield less and this discourages people from buying them. Also, when you are not getting the anticipated returns on such investment, you just have to divest, he stressed.Way forwardOdiah urged the government to review the overall economic policies to recognise what to do to keep the economy moving in order to generate employment and to win international confidence.What type confidence do you want to generate in a country that export only crude oil, and embark on importing more than 50 bye-product of petroleum. Glance through the Nigerian economic outlook since 1960, you will notice that the economic trend has not changed. Out of all the OPEC member countries, which of the major members is still exporting crude oil like Nigeria' We have iron ore deposit in Nigeria, and we have failed to invest in them so that all our high rising buildings would benefit from them and it will generate employment and the economy would be growing.If we stop exporting crude oil and start export of refined petroleum products, Nigeria would be earning foreign exchange, as the demand for domestic international consumption is on the increase on the daily bases. There would be money for diversification. That is why we have to look at the economic policies and amend them. If the economic policies are not right, we cannot grow like that.The Director General, Lagos Chambers of Commerce and Industry, LCCI, Dr. Muda Yusuf stated that the a chunk of our capital market investors are the portfolio investors who are not willing to take any risk on their investment, adding that the happenings within the political environment has created tension and uncertainty that led to massive withdrawal of investment.Yusuf said, For this reason, people quickly move out their liquid investment into other areas or out of the country. People are moving away because of the risk associated with political transition. Again, the normalisation of interest rates in the US economy is another reason for the liquidation of investments an economy like ours, which is creating a better returns on investment in the international market, and is making our own environment less competitive, especially on the rate of returns on investment. The government should inspire confidence on the investors; they must be assured that the election would be credible, free of violence and that there would be no change in policy.The Nation recalls that the former President of Association of National Accountants of Nigeria (ANAN), Dr. Samuel Nzekwe who is also an economic analyst, had stated that the present political condition in the country may discourage foreign investors from coming into the country with their intended investments.He said No investor will come to invest in Nigeria, giving the current happenings in the country. People are threatened and afraid as a result of the recent political situation. All foreign direct investments that the country experienced are short-term funds, which are invested in the financial market. Most foreign investors had started offloading their shares in the stock market, as they have stated retrieving their money from the financial market of Nigeria.Nzekwe bemoaned that this development has also affected the countrys external reserves, saying that it is not healthy for the Nigerian economy. He urged the Federal Government to intensify efforts in addressing the persistent security challenges, adding that it would help in harnessing the countrys comparative advantage in agriculture.The Director General of MAN, Mr. Ajayi Kadiri, who spoke to The Nation, noted that the recent survey conducted by MAN revealed that in the second half of 2017, manufacturing investment declined from N448.94 billion recorded at the corresponding period of 2016 to N176.69 billion.Light at the end of the tunnelIn a piece entitled, Its still the economy, stupid, Alex Otti erstwhile Managing Director of Ecobank Nigeria, admitted that there are clear signs of general despondency what with the rising level of crime and poverty with Nigeria overtaking India as the poverty capital of the world.But in a twist of fate, all that hardly seems to matter as There is the curious growth of interest among the developed economies in the Nigerian market. In quick succession, the Western countries, Asia, Russia and China have practically been tripping over each other either visiting the country or inviting Nigerias top officials to visit them in their countries. Even more curiously is the fact that lately, those who visited simply touched Abuja, the nations capital just to say hi to the President and fulfil all righteousness and the next minute they zoom off to Lagos to spend the night, sign deals and even dance Afrobeat' Macron was quick to seize on his days here in Nigeria to come visiting and dancing. Theresa May gave Abuja some minutes and immediately flew down to meet the young and energetic Lagos State Governor, Akinwunmi Ambode and his equally young and energetic constituents. Angela Merkel also did her own cameo appearance in tow. Surprised' Well, nothing happens by chance.I myself have since given this much thought to this phenomenon and the more I do so, the more I come to believe that the words of Carville are true, it is really the economy that is most important in this game of governance and daily pursuits. Moreover, after considering the on-going events in todays Nigeria, I am further convinced that the statement rings true. In fact, it is still the economy, stupid!
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